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What Are Take-Two Interactive Software's Biggest Risks For Investors?

Is now a good time to take a position on the Grand Theft Auto publisher?

Take-Two Interactive(NASDAQ:TTWO) has been riding high thanks to its megahit Grand Theft Auto V. The game smashed a number of sales records, and estimates suggest the game has generated approximately $2 billion in retail revenue. Further sweetening the pot, the first three months after the game's release saw the title generate $66.4 million in high-margin digital transactions. As if the title's performance weren't impressive enough, it achieved these incredible feats despite launching on only two hardware platforms. An updated version of the title is set to launch this fall on Sony's PlayStation 4, Microsoft's Xbox One, and PC.

While Take-Two's brightest star is undoubtedly the GTA series, the company has also been building value in its other properties. The NBA 2K series has become the go-to for basketball fans, partially thanks to publishing rival Electronic Arts(NASDAQ:EA) delivering buggy, substandard entries in its own NBA Live franchise. Additionally, the Borderlands series has also become highly successful, and it appears to have been a clear influence for Activision Blizzard's (NASDAQ:ATVI) hugely budgeted Destiny. Yet, even with many strong elements, Take-Two is up against some substantial challenges. Can the publisher overcome these massive risks and solidify its status as a gaming powerhouse?

Take-Two's new gaming properties could failGrand Theft Auto stands atop the pantheon of valuable gaming properties, but Take-Two cannot rely on the series exclusively. For too many years, Take-Two posted losses or meager earnings in quarters that didn't feature a GTA release. This fall will see the publisher debut new property Evolve, as well as Sid Meir's Civilization: Beyond Earth, which is a spinoff and reimagining of the established Civilization series.

As Take-Two's most high-profile foray into new IP for the calendar year, Evolve is of considerable importance for the company. The title represents the publisher's attempt to claim a bigger portion of the first-person-shooter market currently dominated by Activision and EA. Take-Two's monster-hunting action game has a lot going for it, but it's also up against substantial competition in the genre. This year alone will play host to Titanfall, Wolfenstein: The New Order, Battlefield: Hardline, Destiny, Call of Duty: Advanced Warfare, Halo: The Master Chief Collection, and others. If Evolve fails to find a wide audience, it will be a big misfire for Take-Two.

Big series like Grand Theft Auto and Borderlands could lose their sparkEven massive series eventually lose their steam. Take-Two's GTA has been shielded from this effect thanks to the publisher's decision not to annualize the series, but expecting the open-world action franchise to go on forever undiminished is a suspect proposition. Given the company's current reliance on its hugely popular franchise, even a mild decline would yield disastrous results.

Source: RockstarGames.com.

This fall will see Take-Two release Borderlands: The Pre-Sequel, an installment in the hugely popular Borderlands series, but the title could be limited by the publisher's choice of platforms. The game has only been announced for PlayStation 3, Xbox 360, and PC, somewhat troubling considering software sales are rapidly transitioning to new consoles. PlayStation 4 and Xbox One versions of the game are likely to show up eventually, but the game and series could be hurt by debuting on the fading platforms. This is particularly true because of Activision's Destiny featuring similar gameplay, launching a month earlier, and hitting almost every system under the sun.

It's also worth mentioning that EA claims to be in the midst of changing its development strategies and improving the quality of its output. Take-Two's NBA2K15 should once again trounce this year's version of NBA LIVE, but if EA can put together a resurgent basketball property, it will damage Take-Two's hold on the market.

Take-Two is not as well-diversified as its competitorsTake-Two's last 10-Q report stated that 13.3% of its revenue in the nine months ending December 31, 2013 came from digital channels. Compare that to Electronic Arts, which earned 45% of its 2013 revenue from digital streams and is targeting above 50% for the current fiscal year, and it's apparent that Take-Two is lagging on this front. Additionally, approximately 80% of Take-Two's business comes from the traditional console industry, making the company much more dependent on the success of consoles like PlayStation 4 and Xbox One than either Activision or EA.

Does Take-Two Interactive represent a sound investment?Shares of Take-Two currently trade at near five-year highs, but the publisher's valuation has yet to recover to pre-Financial Crisis levels. The company's relatively small market cap of approximately $1.69 billion makes it particularly susceptible to the risks it faces, but there are compelling reasons to believe in the company. Its lack of diversification and digital presence are undeniably an issue, but the deficiency also points to an opportunity for substantial growth.

The broader gaming industry is in the midst of rapid expansion, and Take-Two has the strong properties and industry position to benefit. The company stands as an attractive long-term investment option.

Keith Noonan has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard, Apple, and Take-Two Interactive. The Motley Fool owns shares of Activision Blizzard and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.